Working Paper: NBER ID: w6787
Authors: Paul Krugman; E. Davis; D. Weinstein
Abstract: The increasing returns revolution in trade is incomplete in an important respect there exists no compelling empirical demonstration of the role of increasing returns in determining production and trade structure. One reason is that trade patterns of the canonical increasing returns models are a consequence simply of specialization, which all theories permit. Krugman (1980) shows that increasing returns models with costs of trade economic geography do allow a simple test: home market effects of demand on production. Davis and Weinstein (1996) reject the simple Krugman (1980) model on OECD data. Here we pair the model with a richer geography structure and find evidence of the importance of increasing returns, in combination with comparative advantage, in affecting OECD manufacturing production structure. The results underscore the importance of market access in implementing models of economic geography.
Keywords: International Trade; Economic Geography; Increasing Returns
JEL Codes: F1; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic demand (D11) | production (L23) |
| strong domestic demand (R22) | exports (F10) |
| home market effects (F61) | significance of economic geography in international trade (F10) |
| increasing returns (I26) | structure of international production and trade (F12) |